(This story, in slightly different form, originally appeared inthe New York Law Journal.)

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NEW YORK CITY-A federal judge has declined to dismiss a lawsuitbrought by a Long Island couple against a mortgage broker theyclaim was working in tandem with the orchestrator of a Ponzi schemewho is serving prison time for stealing more than $11 million frominvestors. In Iannuzziv. Washington Mutual, 07-cv-00964, Eastern DistrictJudge Joseph F. Bianco has ruled that Anthony and Theresa Iannuzzihad sufficiently alleged that a fiduciary relationship existedbetween them and the mortgage broker, Custom Capital Corp.

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The decision will be published Wednesday.

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"Of course, it is entirely unclear at this juncture whetherdiscovery will reveal facts sufficient to support the existence ofsuch a relationship," Judge Bianco wrote.

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The case is part of a lengthy and complex civil litigation thatarose after the criminal investigation of Peter Dawson, a financialadviser who fleeced dozens of investors of retirement and othersavings.

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Dawson was sentencedto between five and 15 years behind bars in June by Nassau SupremeCourt Justice Jeffrey S. Brown. While in jail awaiting sentencing,Dawson gave voluminous deposition testimony regarding the financialmachinations between him and the various institutions he allegedwere complicit in the thefts.

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A 53-plaintiff class action is being litigated in the casebefore Nassau Supreme Court Justice F. Dana Winslow. The Iannuzzisare not part of that case because their suit was removed to theEastern District last year by one of the defendants.

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The couple, represented by Kevin R. Toole of Westbury, allegefraud, breach of fiduciary duty and violation of the Truth inLending Act against Dawson, Custom Capital and several lenders,including Washington Mutual and American Mortgage Network.

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According to the decision, Dawson had served as the couple'sfinancial adviser for 15 years. In early 2006, they discussed withhim the possibility of obtaining a reverse mortgage on the theirhome.

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Under a reverse mortgage, seniors can receive money for theequity in their homes, but the obligation to repay the loan isdeferred until the homeowner dies.

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After deciding to apply for the reverse mortgage, the Iannuzzisclaim they were introduced by Dawson to Michael Laucella, whoworked for Custom Capital. Dawson allegedly told the Iannuzzis hehad a "working relationship" with Laucella.

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The couple alleged they were never told Laucella was a convictedfelon who had served time for "securities and other financialcrimes prior to his becoming employed" by Custom Capital.

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"During the communications with [Custom Capital], plaintiffswere asked a limited number of superficial questions that did notencompass the scope of the information or documentation that wouldbe required to fully complete an application for a mortgage of anykind," the couple alleged in their complaint.

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They also contend they believed Custom Capital was acting astheir broker to secure "the best possible reverse mortgage product"for them.

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Dawson subsequently allegedly advised the Iannuzzis that theyhad been approved for a reverse mortgage by American MortgageNetwork, referred to as AmNet in the decision.

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At a purported May 2006 closing, the Iannuzzis, who were notrepresented by counsel, executed "various documents" they believedwere to secure a $300,000 reverse mortgage, according to thedecision.

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Dawson gave the couple a check for $3,600, telling them it wasthe first monthly installment they would be receiving under thereverse mortgage, according to the complaint. The checks continueduntil October 2006.

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In November 2006, Washington Mutual advised the Iannuzzis theywere late on their mortgage payments and owed $5,258.

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Ruling that Custom Capital Corp. was not a creditor, JudgeBianco dismissed the claim against it based on an alleged violationof the Truth in Lending Act.

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"This Court joins the overwhelming number of other courts thathave held that a mortgage broker does not qualify as a creditorunder TILA," the judge wrote, citing to the statutory language of15 U.S.C. §1601 (f).

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That section defines a creditor as someone who "regularlyextends consumer credit if, in any 12-month period, the personoriginates more than one credit extension...or one or more suchcredit extensions through a mortgage broker."

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In the Iannuzzis' case, the judge said, "plaintiffs do notallege that CCC was a party to the loan or acted as a 'creditor'under TILA; rather, the allegation is that CCC acted as a mortgagebroker. Because CCC did not function as a creditor or lender in thetransaction, it cannot be held liable under TILA."

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However, the judge did find that a fiduciary duty claim couldproceed against Custom Capital.

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Noting that New York courts traditionally have held that thereis no such relationship between mortgage brokers and borrowers,Judge Bianco nevertheless ruled one existed in this case.

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"[A]s CCC recognized in its papers and at oral argument, abroker may take on a fiduciary duty by performing tasks and/ortaking on obligations beyond that of an independent broker ortraditional middleman," he wrote.

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Judge Bianco ruled that the couple's claim that they wereadvised of a close relationship between Dawson and Laucella, whothey believed went beyond the scope of duty to secure a favorablelender, sufficiently alleged breach of fiduciary duty.

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"The Court concludes that the Amended Complaint sufficientlyalleges that CCC engaged in conduct, as well as maderepresentations to plaintiffs, that created a fiduciaryrelationship with plaintiffs," the judge wrote.

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He also declined to dismiss a cross-claim against Custom Capitalbrought by AmNet on contractual indemnity and common lawcontribution grounds.

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L'Abbate, Balkan, Colavita & Contini of Garden Cityrepresented Custom Capital.

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In court papers, Scott Kossove of L'Abbate Balkan called theIannuzzis' fiduciary duty claim "meritless," writing that theyacknowledged they "did not have any meaningful communications withCCC that could even possibly give rise to a heightened duty on thepart of CCC to plaintiffs."

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Kossove pointed to the couple's reliance on Dawson to set up theloan. Their claim that "facts may come to light during the courseof discovery" demonstrating a fiduciary relationship was "nothingbut idle speculation," he said.

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The judge also denied a cross-claim against Custom Capitalbrought by AmNet on contractual indemnity and common lawcontribution grounds.

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John P. Foudy of Rosner, Nocera & Ragone in Manhattanrepresents three of the lenders, including AmNet and WashingtonMutual.

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AmNet had no direct contact with the Iannuzzis, he said.

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"There was no reverse mortgage--the plaintiffs' claim that theyintended to enter into a reverse mortgage but the applicationsubmitted by Custom Capital on behalf of plaintiffs was for astandard mortgage," he said.

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Foudy characterized the decision as "thorough," but stressedthat Judge Bianco noted "he is accepting the allegations at facevalue, and that's what they are--allegations."

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Jacob H. Zamansky of Zamansky & Associates in Manhattan,said the ruling may have an impact on his plaintiff class nowbefore Justice Winslow in Nassau Supreme.

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"There are similar issues there," he said in an interview,adding that Custom Capital is the mortgage broker for seven oreight of the plaintiffs he represents.

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Vesselin Mitev can be reached at [email protected].

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